[Federal Register Volume 76, Number 125 (Wednesday, June 29, 2011)]
[Notices]
[Pages 38235-38237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16225]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64730; File No. SR-NYSEArca-38]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Adopting New NYSE 
Arca Equities Rule 7.41 to Codify Outbound and Inbound Routing 
Functions Performed by Its Affiliate Broker-dealer, Archipelago 
Securities LLC

June 23, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on June 16, 2011, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by NYSE Arca. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes new NYSE Arca Equities Rule 7.41 to codify 
outbound and inbound routing functions performed by its affiliate 
broker-dealer, Archipelago Securities LLC (``Arca Securities''). The 
text of the proposed rule change is available at the Exchange's 
principal office, at http://www.nyse.com, at the Commission's Public 
Reference Room, and at the Commission's Web site at http://www.sec.gov.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes new NYSE Arca Equities Rule 7.41 to codify 
outbound and inbound routing functions performed by its affiliate 
broker-dealer, Arca Securities, which have previously been approved by 
the Commission.\3\
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    \3\ The Exchange's affiliates, New York Stock Exchange, LLC 
(``NYSE'') and NYSE Amex LLC (``NYSE Amex''), are proposing 
substantially similar rule changes. See SR-NYSE-2011-24 and SR-
NYSEAmex-2011-39.
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Background--Arca Securities Functions as Routing Broker
    Arca Securities currently is the primary outbound and inbound 
routing broker for NYSE Arca. The terms of the outbound routing 
function for NYSE Arca are generally set forth in the Commission's 
approval orders,\4\ rather than rule text,\5\ and permit NYSE Arca to 
utilize Arca Securities to route orders to an away market center for 
execution whenever such routing is required by Exchange Rules and 
federal securities laws. The terms of the outbound routing function of 
Arca Securities generally are as follows:
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    \4\ See Securities Exchange Act Release No. 52497 (September 22, 
2005), 70 FR 56949, 56952-56953 (September 29, 2005) (SR-PCX-2005-
90).
    \5\ NYSE Arca Equities Rule 7.31 sets forth order types 
available for trading on the Exchange, including those that may 
route to another market center, and NYSE Arca Equities Rule 1.1(qq) 
defines the term ``Routing Agreement.''
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    Arca Securities operates and is regulated as a facility of the 
Exchange, subject to and consistent with Section 6 of the Securities 
Exchange Act of 1934 (``Act'').
    A self-regulatory organization (``SRO'') unaffiliated with the 
Exchange or any of its affiliates (currently the Financial Industry 
Regulatory Authority or ``FINRA''), carries out oversight and 
enforcement responsibilities as the Designated Examining Authority 
(``DEA'') designated by the Commission pursuant to Rule 17-1 of the Act 
with the responsibility for examining Arca Securities for compliance 
with the applicable financial responsibility rules.
    The agreement between the Exchange and FINRA pursuant to Rule 17-2 
under the Act allocates to FINRA the responsibility to receive 
regulatory reports from Arca Securities, to examine Arca Securities for 
compliance and to enforce compliance by Arca Securities with the Act, 
the rules and regulations thereunder and FINRA rules, and to carry out 
other specified regulatory functions with respect to Arca Securities.
    ETP Holders' use of Arca Securities to route orders to another 
market center from the Exchange is optional.\6\
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    \6\ An ETP Holder that does not want to use Arca Securities may 
use other routers to route orders to other market centers or choose 
to send an order to the Exchange that, if not executable on the 
Exchange, will be cancelled and returned to the ETP Holder, at which 
time the ETP Holder could choose to route the order to another 
market itself.
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    Arca Securities will not engage in any business other than its 
outbound routing function (including, in that function, the self-
clearing functions that it currently performs for trades with respect 
to orders routed to other market centers) and other activities approved 
by the Commission.
    The operation of Arca Securities as a facility of the Exchange 
providing outbound routing services is subject to Exchange and 
Commission oversight and the Exchange must file with the Commission 
rule changes and fees relating to Arca Securities.
    The inbound routing function of Arca Securities currently is 
governed by a pilot program established to permit Arca Securities to 
route orders from NYSE and NYSE Amex to NYSE Arca.\7\ The

[[Page 38236]]

pilot was extended and is currently scheduled to expire on September 
30, 2011.\8\ The terms of the inbound routing pilot are generally set 
forth in the Commission's approval orders, rather than rule text 
(except as noted below).\9\ The terms of the pilot are as follows:
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    \7\ See Securities Exchange Act Release No. 58681 (September 29, 
2008), 73 FR 58285 (October 6, 2008) (SR-NYSEArca-2008-90). See also 
Securities Exchange Act Release No. 59010 (November 24, 2008), 73 FR 
73373 (December 2, 2008) (SR-NYSEArca-2008-130).
    \8\ See Securities Exchange Act Release Nos. 60750 (September 
30, 2009), 74 FR 51635 (October 7, 2009) (SR-NYSEArca-2009-87) 
(extending pilot from September 29, 2009 to December 31, 2009); 
61247 (December 31, 2009), 75 FR 1096 (January 8, 2010) (SR-
NYSEArca-2009-115) (extending pilot from December 31, 2009 to March 
31, 2010); 61813 (March 31, 2010), 75 FR 17459 (April 7, 2010) (SR-
NYSEArca-2010-19) (extending pilot from March 31, 2010 to September 
30, 2010); 62883 (September 2, 2010), 75 FR 55382 (September 10, 
2010) (SR-NYSEArca-2010-82) (extending pilot from September 30, 2010 
to March 31, 2011); and 64042 (March 2, 2011), 76 FR 13440 (March 8, 
2011) (SR-NYSEArca-2011-06) (extending pilot from March 31, 2011 to 
September 30, 2011).
    \9\ See supra note 9.
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    The Exchange and the Financial Industry Regulatory Authority 
(``FINRA'') have entered into a Rule 17d-2 agreement pursuant to which 
FINRA is allocated regulatory responsibilities to review Arca 
Securities' compliance with certain Exchange rules. The Exchange, 
however, retains ultimate responsibility for enforcing its rules with 
respect to Arca Securities.
    NYSE Regulation monitors Arca Securities for compliance with the 
Exchange's trading rules and collects and maintains certain related 
information. Specifically, NYSE Regulation collects and maintains the 
following information of which NYSE Regulation staff becomes aware--
namely, all alerts, complaints, investigations and enforcement actions 
where Arca Securities is identified as a participant that has 
potentially violated Exchange or applicable SEC rules--in an easily 
accessible manner so as to facilitate any review conducted by the SEC's 
Office of Compliance Inspections and Examination.
    NYSE Regulation has agreed with the Exchange that it will provide a 
report to the Exchange's Chief Regulatory Officer, on a quarterly 
basis, that (i) Quantifies all alerts (of which NYSE Regulation is 
aware) that identify Arca Securities as a participant that has 
potentially violated Exchange or SEC rules, and (ii) quantifies the 
number of all investigations that identify Arca Securities as a 
participant that has potentially violated Exchange or Commission rules.
    NYSE Euronext, as parent of the Exchange, was obligated to adopt a 
rule requiring it to establish and maintain procedures and internal 
controls reasonably designed to ensure that Arca Securities does not 
develop or implement changes to its system, based on non-public 
information obtained regarding planned changes to the Exchange's 
systems as a result of its affiliation with the Exchange, until such 
information is available generally to similarly situated ETP Holders of 
the Exchange.\10\
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    \10\ See supra note 9. See also NYSE Arca Equities Rule 14.3(e).
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    Since the initiation of the inbound routing pilot in 2008, the 
Exchange in 2010 entered into a comprehensive Regulatory Services 
Agreement (``RSA'') with FINRA that, among other things, allocated to 
FINRA responsibility for the functions noted above that NYSE Regulation 
previously performed with respect to Arca Securities (e.g., monitoring 
Arca Securities' compliance with the Exchange's trading rules).\11\ As 
a result of this RSA and the Rule 17d-2 agreement, the only regulatory 
functions related to Arca Securities that remain with NYSE Regulation 
are the provision to FINRA of the exceptions noted above of which NYSE 
Regulation becomes aware (e.g., alerts involving Arca Securities) and 
the receipt of the quarterly report noted above, which is now produced 
by FINRA.
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    \11\ The Exchange notes that FINRA reviews both inbound and 
outbound routing via Arca Securities pursuant to the 17d-2 agreement 
and the RSA. The Exchange will review the terms of the RSA in 
connection with this proposed rule change, and will amend it to 
reflect the specific terms of this filing.
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Proposed Rule Change
    In order to provide more clarity and transparency to all of the 
functions that Arca Securities performs on behalf of the Exchange, NYSE 
Arca proposes to add NYSE Arca Equities Rule 7.41 to define the term 
``Routing Broker'' and describe the outbound and inbound routing 
functions. By doing so, the Exchange would establish a single, central 
location in its Rules describing all routing broker functions, 
including both outbound and inbound routing. The proposed rule text in 
Rule 7.41 would be substantially the same as the language set forth in 
the Commission notices applicable to the Exchange and virtually 
identical to rule text already implemented for other exchanges.
    In this regard, the rule text covering outbound routing would be 
virtually identical to the NYSE's rule text covering outbound routing 
by NYSE,\12\ and would track the terms of the outbound routing language 
noted above. In addition, the rule text covering inbound routing would 
be virtually identical to the BATS' rule text covering inbound routing 
by BATS, and would track the terms of the inbound routing pilot noted 
above (and as set forth in the rule filings), with the following 
exceptions.\13\ First, the rule text would reflect that certain 
regulatory functions are now carried out by FINRA on behalf of NYSE 
Regulation, rather than by NYSE Regulation directly. Second, the rule 
text would require procedures and controls that are reasonably designed 
to prevent Arca Securities from receiving any benefit, taking any 
action or engaging in any activity, based on non-public information 
regarding planned changes to Exchange systems obtained as a result of 
its affiliation with the Exchange, until such information is available 
generally to similarly situated Exchange ETP Holders, in connection 
with the provision of inbound order routing to the Exchange.\14\ In 
comparison, the current language from the inbound routing pilot 
requires procedures and controls that are reasonably designed to ensure 
that Arca Securities does not develop or implement changes to its 
system, based on non-public information obtained regarding planned 
changes to the Exchange's systems as a result of its affiliation with 
the Exchange, until such information is available generally to 
similarly situated Exchange ETP Holders. The Exchange also proposes to 
include specific rule text to codify the current date upon which the 
inbound routing pilots are set to expire--September 30, 2011.
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    \12\ See NYSE Rule 17(c).
    \13\ See BATS Rule 2.12. See also Securities Exchange Act 
Release No. 62901 (September 13, 2010), 75 FR 57097 (September 17, 
2010) (SR-BATS-2010-024).
    \14\ The Exchange notes that the text proposed in Rule 
7.41(c)(2) would make clear that the Exchange may furnish to Arca 
Securities the same information on the same terms that the Exchange 
makes available in the normal course of business to any other ETP 
Holder.
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2. Statutory Basis

    The proposed rule change is consistent with Section 6(b) \15\ of 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\16\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest. The Exchange believes

[[Page 38237]]

that the proposed rule change, which would add specific rule text for 
routing functionality that has already been approved in substance by 
the Commission for the Exchange, would enhance the clarity and 
transparency surrounding such functionality, including the 
responsibilities and obligations attendant therewith, while also 
reflecting the Exchange's ongoing efforts to effectively address the 
concerns previously identified by the Commission regarding the 
potential for informational advantages favoring Arca Securities vis-
[agrave]-vis other non-affiliated NYSE Arca ETP Holders. The Exchange 
also believes that the proposed rule change would support the 
principles of Section 11A(a)(1) of the Act \17\ in that it seeks to 
assure economically efficient execution of securities transactions.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days after the date of the filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest, the proposed rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \18\ and 
Rule 19b-4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\20\ 
However, Rule 19b-4(f)(6)(iii) \21\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange requests that the 
Commission waive the 30-day operative delay. The Exchange believes that 
waiver of the 30-day operative delay would provide more clarity and 
transparency in its rule text concerning all of the functions that Arca 
Securities performs on behalf of the Exchange without undue delay. In 
addition, the Exchange notes that the proposal is consistent with the 
rules of another national securities exchange. For these reason, the 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, 
and designates the proposed rule change to be operative upon filing 
with the Commission.\22\
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    \20\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Exchange has satisfied this requirement.
    \21\ Id.
    \22\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSEArca-2011-38 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2011-38. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSEArca-2011-38 and should be submitted on or before July 20, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16225 Filed 6-28-11; 8:45 am]
BILLING CODE 8011-01-P